Polsinelli TrBK Distress Indices Special Report: Causes of Healthcare Distress in 2014, Executive Summary

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1 Polsinelli TrBK Distress Indices Special Report: Causes of Healthcare Distress in 2014, Executive Summary real challenges. real answers. SM Polsinelli Financial Indices LLC. All rights reserved.

2 Introduction Welcome to the Executive Summary of the first Polsinelli TrBK Distress Indices Special Report: Causes of Healthcare Distress in We believe that studying distress in the U.S. economy provides helpful information to successful companies and investors in the space about how to remain successful and avoid the pitfalls of other industry participants. The continuing implementation of the Affordable Care Act in 2014 was, in many ways, a watershed for healthcare in the United States. In addition, the healthcare industry has been rapidly changing for several years as the demographics of the country have shifted, the regulatory environment has evolved, and technology has come more and more to the forefront. The Special Report examines how companies have faltered in this rapidly changing healthcare environment, which enables participants in the market such as healthcare companies, funds that invest in the space, and the wider public, to glean significant insights based on where the healthcare industry has been in the past and where it is likely headed in the future. 1 By Bobby Guy, Robert Dempsey, Jeremy Johnson, and Shanti Katona. The team greatly appreciates the efforts of colleagues Tara Cyr, Sara Iams, Reid Johnson, Dayna LaPlante, Ryan Thurber and Joseph Van Leer. 1

3 Understanding the Indices and this Report The Special Report is based on the data used to calculate the Polsinelli TrBK Healthcare Services Distress Research Index (the Healthcare Services Distress Index ). The Healthcare Services Distress Index is one of three Polsinelli TrBK Distress Indices produced quarterly and calculated from screened Chapter 11 filing data. To be included in the Healthcare Services Distress Index, a healthcare company must have assets greater than $1million, be an entity rather than an individual, and must have selected the Healthcare Business designation on its initial Chapter 11 petition (a designation that generally fits companies providing patient services). Further detail on the methodology, preparation and publication of the indices can be found at In preparing the Special Report, the team analyzed all of the companies that were included in the calculation of the Healthcare Services Distress Index in This consists of 83 companies (the Index Companies ). As the Distress Indices are calculated on a rolling four-quarter basis, this is the same set of companies that was used to calculate the index value for the Fourth Quarter of The Index Companies represent numerous subsectors in the healthcare services industry including hospitals, surgery centers, clinics, physician practices, senior living, imaging, and community centers, among others. One major difference between the Healthcare Services Distress Research Index (indeed, all of the Polsinelli TrBK Distress Indices) and many other commonly known financial indices is that the Healthcare Services Distress Index is not limited to publicly-traded companies. Instead, it includes companies regardless of whether they are publiclytraded or privately-held. As a result, the Healthcare Services Distress Index provides a broader picture than is usually available through the public markets, encompassing Main Street as well as Wall Street. The Healthcare Services Distress Index acts as a proxy for distress in the healthcare services sector. Accordingly, the causes cited by the Index Companies for their business difficulties are anticipated to provide a snapshot of the challenges that may be faced by healthcare services companies throughout the sector. 2

4 Overview of the Analysis The team examined certain primary sources for the Index Companies to determine the causes cited by each company for its Chapter 11 filing. In the rare case where information was not readily available in publicly filed bankruptcy documents, the team also reviewed press reports where available to find causes. The causes were then divided into 17 categories, based on the reasons disclosed by the Index Companies for each of their filings. There are 15 primary categories, plus a 16th category for Other and a 17th category for Undisclosed. In order to minimize inconsistencies in categorization and to ensure that the categories accurately represented the cited causes, the categories were created after collecting the actual causes cited by the Index Companies. Each final category was given specific criteria based upon certain general definitions. There was no pre-determination as to how many categories would exist, and instead, the categories were created to fit the causes emerging from the data. Notably, the causes outlined in the Special Report are the causes identified by the Index Companies themselves. The authors have not done an independent examination of the causes, but have relied on what are, in many cases, statements made in court filings by principals of the Index Companies. 3

5 Causes of Health Care Distress in 2014 The Index Companies cited the following reasons as the top six causes of their Chapter 11 filings in 2014: CAUSES BY CATEGORY PERCENTAGE OF INDEX COMPANIES CITING CAUSE 2 Tort Litigation 24.10% Payment Delay 21.69% Bad Merger/Overexpansion 20.48% Labor/Employee Litigation 20.48% Management Issues 20.48% Reimbursement Changes 20.48% Tort Litigation registered as the most frequently cited cause by the Index Companies in 2014, with Payment Delay close behind. Four additional causes tied for third place. On a combined basis, Payment Delay and Reimbursement Changes both of which often relate to government reimbursement of healthcare providers were cited as contributing factors in more than 40% of the financial struggles of the Index Companies. Payment Delay was sometimes the result of actions of the Index Companies, and other times the alleged result of government activity or budget constraints; Reimbursement Changes were generally the result of regulatory modifications affecting reimbursement rates or methods. One large group of cases filed by affiliated skilled nursing facilities in California helped drive Tort Litigation, Payment Delay, and Labor/Employment Litigation into the top six causes. 2 Note that most of the Index Companies cited more than one reason for their Chapter 11 filings, whether two, three, or as many as four reasons. 4

6 Understanding the Categories A brief explanation of the categories is helpful in understanding the underlying causes that the Index Companies cited for their business difficulties. Note that the team rejected having a category related to creditor litigation or non-payment of expenses, as such categories would confuse cause with effect. Creditor litigation and non-payment of expenses are effects that occur because a business is not generating sufficient revenue to cover expenses, and the purpose of the Special Report is to determine the underlying causes that led to the business failure. The top six categories are defined generally as follows: 1. Tort Litigation refers to patient or resident litigation against the healthcare provider, rather than all non-contract litigation. 2. Payment Delay refers to collection difficulties, usually specific to Medicare and Medicaid, including slow pay or delays in reimbursement. 3. Reimbursement Changes refers to changes occurring under the Affordable Care Act, the Sequester (automatic cuts to the budget of the federal government that took effect in 2014) 3, and reductions or perceived low levels of reimbursement for certain industries. 4. Management Issues refers to firing of the management team, management incompetence, employee misconduct, failed internal controls resulting in unnecessary losses, alleged management company incompetence, and major disputes with a management company. 5. Labor/Employee Litigation refers to claims and judgments based on federal and state labor violations (fair labor standards act, etc.) and union disputes, employee discrimination, workers compensation contributions, and class actions related to the foregoing. 6. Bad Merger/Overexpansion refers to unprofitable or badly-integrated merger situations that burden the acquirer, and growth initiatives that fail, including due to inadequate start-up capital and construction overruns. 3 See, e.g., 5

7 How to Obtain the Full Report With Underlying Data This Executive Summary is an abridgement of the Polsinelli TrBK Distress Indices Special Report: Causes of Healthcare Distress in The full report is produced by Polsinelli Financial Indices, LLC ( and is available for purchase directly from the TrollerBK.com bankruptcy service ( For press inquiries, please contact Bobby Guy at or 6

8 Publication Information and Disclaimer This Executive Summary and the Polsinelli TrBK Distress Indices are licensed to Polsinelli PC for publication purposes. Summaries of any quarterly, annual or special reports are also licensed to Polsinelli PC by Polsinelli Financial Indices, LLC. Sales of bankruptcy filing data are handled solely by TrollerBK.com. The indices and this summary are research intended for informational and educational use only. Data is provided exclusively by the TrollerBk.com bankruptcy service, and the Indices are prepared with assistance from CBIZ Valuation Group, LLC. As research indices, the Polsinelli TrBK Distress Indices are subject to restatement for up to two years. Pursuant to statistical precision analysis, the bankruptcy data used to generate the indices is calculated to be accurate to at least a +/- 6% margin of error at a 95% confidence level. The Indices are published quarterly, generally within 45 days after the end of each calendar quarter, and are overseen by an Index Advisory Committee consisting of Bobby Guy (Polsinelli), Robert Dempsey (Polsinelli), Richard Romero (CBIZ Valuation Group, LLC), Prof. Matthew S. Shotwell, Ph.D (Vanderbilt University ) 4, and a representative from TrollerBk.com. All publications are subject to copyright, trademark, and legal protections. Permission to reprint the indices and the contents of this summary is granted to recipients so long as appropriate attribution is given to Polsinelli TrBK and the indices and this summary are presented in their original formats with their appropriate names. Disclaimer Polsinelli PC, Polsinelli LLP in California, Polsinelli Financial Indices LLC, TexHost, LLC, and their members, associates, staff, advisors, and agents shall not have any liability for any information contained herein, including any errors or incompleteness. The contents of this publication are not intended, and should not be considered, as accounting, tax, investment, or legal advice. Further, this information is not intended to and does not provide a recommendation with respect to any security or investment strategy, and any discussion of particular topics is not meant to be comprehensive and may be subject to change. Further, the choice of a lawyer, financial advisor, investment advisor or other professional is an important decision and should not be based solely upon advertisements, and no recommendation is made herein. 4 Matthew S. Shotwell, Ph.D., is Assistant Professor, Department of Biostatistics, Vanderbilt University, and acts as an independent consultant in connection with the Polsinelli TrBK Distress Indices. No affiliation between the indices and Vanderbilt University is expressed or implied. 7